World View & Market Commentary. Forest first; Trees second. Focused on Real & Knowable facts that filter through the "experts" fluff and media hyperbole. Where we've been, what the future may hold and developing a better way forward.

Friday, May 8, 2009

Tim Geither & Co. must be proud of this Goldman/Morgan orchestrated rally. Bravo…

For those who maybe weren’t raised by Dr. Spock parents or weren’t baby sat by Captain Kangaroo, you may not be familiar with the story of the little engine who could. Here’s a refresher:

Yes, my mother read me stories like this as a child! And I’m certain if we all just put our power of positive thoughts into it, why that debt will be gone in no time!

That must be why I keep reading things like, “This rally just feels like the banks are going to make it…”

And, “Things aren’t as bad as people thought they were going to be and government is being very kind to the banks,” said Jon Fisher who also said, “It’s not that onerous. Every single one of them is going to be able to raise capital.”

Uh huh. No doubt little Timmy is being kind to the banks but if you are investing on your “feel” good psychology (psychosis?), then you might want to think a little about the underlying math.

But Timmy thinks we can avoid the Japanese zombie bank lost two decades. Sure we can, I agree! We are MUCH worse off than Japan and will suffer way worse in the long run, but that’s just me, here’s what Timmy thinks:

May 8 (Bloomberg) -- Treasury Secretary Timothy Geithner is betting that U.S. banks can do something their Japanese counterparts were unable to accomplish in that country’s “lost decade” of the 1990s: earn their way out of trouble.

The stress-test results released yesterday by regulators found that the 19 largest banks face a $74.6 billion capital hole that may be filled mostly by private money. That compares with the hundreds of billions of dollars seen by outside analysts, including the International Monetary Fund, and takes into account banks’ projected earnings over the next two years.

The “stress-test results are an important step forward,” Geithner said in a statement announcing the results. “Americans should know that the government stands behind the banking system and that their deposits are safe.”

Still, the strategy carries risks for Geithner, 47, who served as a Treasury attaché to Japan from 1989 to 1991. If he’s wrong about the banks’ ability to weather the worst recession in at least half a century, the U.S. may just be postponing the day of reckoning when institutions will have to be shut down and taken over by the government.

“This looks like Japan in 1998, when they didn’t spend enough money on the banks,” said Adam Posen, deputy director of the Washington-based Peterson Institute for International Economics. “They then ended up back in crisis in 2001.”

Paying OffSo far, Geithner’s gamble is paying off. Bank stocks have surged in recent weeks as investors bet the stress tests would give the lenders a clean bill of health. The Standard & Poor’s 500 Financials Index reached its highest level in four months on May 6 as the test results leaked out, before slipping 5.8 points yesterday to 162.3.

Geithner said the strategy was designed to ease the uncertainty that drove bank shares down earlier this year. By exposing the lenders to uniform tests and then publicizing the results, he hoped to reassure investors that their worst fears about the future of the banking system were unfounded.

Regulators led by the Federal Reserve found that nine of the 19 biggest banks, including Goldman Sachs Group Inc. and JPMorgan Chase & Co., don’t need more capital. Bank of America Corp. has the biggest hole -- $33.9 billion -- followed by Wells Fargo & Co., with $13.7 billion. Banks that need to bolster capital have until June 8 to develop a plan and until Nov. 9 to implement it.

Potential LossesGeithner told reporters that regulators took a conservative approach to toting up potential credit losses and calculating the industry’s ability to absorb them through increased earnings. The forecast of future profits was at the “quite low end of analysts’ expectations,” he said.

The results showed that losses at the banks under “more adverse” economic conditions than most economists anticipate could total $599.2 billion over two years. Mortgage losses present the biggest part of the risk, at $185.5 billion.

Jan Hatzius, chief U.S. economist at Goldman Sachs in New York, said banks may be able to rack up enough earnings over the next two years to cover virtually all the remaining credit losses.

The contraction of the financial industry over the last year, including the demise of Bear Stearns Cos. and Lehman Brothers Holdings Inc., has put those that have survived in a better position to post profits, he said.

With the economy showing signs of being close to a bottom, some of the banks may even end up being overcapitalized, added Sung Won Sohn, an economics professor at California State University in Camarillo, California.

Too Easy?Critics remain unconvinced and charge that the regulators went too easy on the banks in conducting the tests, which were designed to ensure the firms could keep lending even if the economy deteriorated more than most economists expect.

Examiners used an “adverse scenario” of a 3.3 percent contraction in the economy this year, and an average unemployment rate of 8.9 percent in 2009 and 10.3 percent in 2010. Economists see a 2.5 percent drop in output this year, and unemployment rates of 8.9 percent in 2009 and 9.4 percent in 2010, according to a Bloomberg News survey.

“The stress was not much of a stress,” said Joseph Stiglitz, a Nobel Prize winner in economics and professor at Columbia University in New York.

Skeptics of the plan such as Posen said Geithner was trying to make a virtue out of a necessity. With public opposition to bank bailouts high, the Treasury secretary felt constrained from asking Congress for more money to help the industry. Treasury has about $110 billion left in the $700 billion bank-rescue package approved by lawmakers last year.

Ready for More Geithner said the Treasury had enough money remaining in the Troubled Asset Relief Program to cover the banking industry’s needs. Still, he made clear that President Barack Obama wouldn’t hesitate to ask Congress for more should that prove necessary.

Yep, get ready for more! Oh, I’m sure it will prove necessary, no doubt. See, they need more of your money and will come and get it, of that I am sure.

I’m also sure that we will avoid becoming like Japan. You see, unlike Japan, we are a nation of debtors, not savers. And unlike Japan in late 1989, we are not surrounded by a world experiencing the greatest credit bubble in the history of mankind. In fact just the opposite. We are surrounded by a world experiencing the greatest credit collapse of all time.

But that certainly doesn’t mean that we’re not going to try. Just like the little engine that could, Timothy will keep giving to the banks because, because, well because they are more deserving of your money than you? No, that’s not it, it’s because without their “credit” making ability heaven will fall from the sky, Armageddon will befall the planet, and nukes will be going off in your own backyard!

So, to prevent that from occurring, we create money (yes, from thin air), and we indebt ourselves beyond the point that is EVER possible to repay (as in mathematically impossible), and we “lend” money to the bankers (using worthless derivatives as collateral), so that they can claim to have “reserves” (which we now use taxpayer dollars to pay them interest on), and that way they can lever back up and get “credit” flowing again! Yay! Boy, that sure “feels good.”

Oh, and don’t forget that they are taking more of your money, indebting you further still, and printing more money that doesn’t exist to buy up near worthless mortgage paper via Freddie and Fannie AND to buy up our own debt (Treasuries) in an unbelievable attempt to try to make people think that interest rates are lower than they actually are! What that does is allow the banks to borrow money at historic low rates and to lend it to YOU at historic HIGH rates, sometimes up to 30% on your credit card, and in this manner, the BANKS WILL BE SAVED.

That is, of course, until everyone realizes that this entire process of saving the banks DESTROYS THE CONSUMER and demolishes the economy. Which is exactly what is happening and what will continue to happen, only more so. So GET READY, little Timmy is the little engine who could. He is chugging up hill and he thinks he can, he thinks he can… and I’m sure he will.

Now, I hate to be negative and all, BUT, this is a little clip I would really like to embed here but some ridiculously positive person who was obviously raised by a Dr. Spock parent disabled the embedding feature and so you will just have to follow the link for 5 seconds of fun! Oh yeah, I’m great at parties… ;-)